Signing a lease signifies a commitment, much like taking on a loan or a credit card.
But what happens when life's unpredictable turns force you to re-evaluate this commitment? Does breaking a lease have any bearing on your credit score?
Read on to learn more.
What is a lease agreement?
Leases are very common in our everyday lives, from renting apartments to leasing cars. A lease agreement represents a legal contract between two parties: the lessee and the lessor. Typically involving property or assets, these contracts spell out the terms of the lease.
These highly specific terms and conditions are listed and represent a binding agreement under which one party can use an asset that’s legally owned by another party. Should any party involved fail to adhere to the lease terms, they could face legal repercussions, from monetary penalties to more severe legal actions.
While lease durations vary, many standard property leases last for 12 months. The terms might include payment frequency, maintenance responsibilities, and conditions for renewal or termination.
How is a credit score calculated?
Your credit score is a numerical representation of your creditworthiness. Derived from your credit report, it gives potential lenders a quick snapshot of your financial reliability.
Factors affecting your credit score include:
- Payment history: Timely payments are crucial. Late or missed payments can significantly reduce your score.
- Credit utilization: This refers to how much of your available credit you're using. A lower percentage is generally better for your score.
- Length of credit history: Older accounts can benefit your score, showcasing stability. Types of credit in use: A mix of credit types (e.g., credit cards, mortgages) can positively influence your score.
- New credit inquiries: Frequent hard inquiries might indicate financial distress, potentially lowering your score.
What happens when you break a lease?
Breaking a lease involves more than just packing your belongings and leaving. Terminating your lease agreement before the specified end date brings about a range of domino effects.
Immediate implications include:
- Financial penalties: Many lease agreements have explicit clauses specifying punitive measures for premature termination. This might look like forfeiture of your security deposit and the required payment of a few months' rent.
- Legal consequences: In extreme cases, landlords may take legal action for lost revenue. This adds court costs and potential attorney fees to your financial burden.
Long-term impacts include:
- Rental history: Future landlords review rental history diligently, and any signs of a broken lease can cause you to be seen as unreliable. This can affect your ability to rent in the future and may even result in higher up-front costs like extra security deposits.
- Relationships with future landlords: Word gets around in tight-knit property communities, and a reputation tarnished by breaking a lease can make future leasing negotiations more difficult.
How does breaking a lease influence your credit score?
Breaking a lease doesn't typically lead to an immediate dip in your credit score, but there are several indirect ways that your credit score may be affected.
The potential impacts on your credit report include:
- Report by landlords: While not a common occurrence, landlords might file a report if you leave substantial unpaid debts in your wake.
- Collection agencies and broken leases: Any action from collection agencies is reported to credit bureaus and remains on your credit report for up to seven years, causing severe harm to your credit.
- Increased debt: Accrued financial penalties from breaking a lease increase your overall debt load, which can inflate your credit utilization ratio — a key determinant in your credit score calculation.
Are there any exceptions or ways to minimize the damage?
Life often throws curveballs our way. In some cases, we must make unavoidable decisions, like breaking a lease early. Sometimes, though, there are legal cushions to soak up some impact.
Legal grounds to break a lease without penalty
Under constructive eviction, a tenant is allowed to break their lease without penalty should the property become uninhabitable. Whether it's a severe leak or a broken heating system in subzero temperatures, a landlord's failure to address these issues can release a tenant from his or her lease obligations.
If your landlord repeatedly enters the property without ample notice (the specifics of which vary by state) or fails to maintain living conditions outlined in local housing codes, this may also justify legally breaking a lease agreement.
Finally, in the U.S., the Servicemembers Civil Relief Act (SCRA) allows those called to active duty to break residential leases without penalty, given specific conditions are met.
Negotiating with your landlord
Transparent communication about why you need to end your lease early might inspire empathy and flexibility from your landlord. For instance, if you're relocating for work purposes, providing an early notice gives your landlord time to find a replacement tenant, reducing their potential revenue loss.
Assisting your landlord in finding one can help soften the blow. Even paying some expenses, like lost rent or costs tied to finding a new lessee, could help you avoid larger penalties or even court cases. However, it’s important to note that your landlord is not required to negotiate.
What steps can you take if your credit is affected?
Taking proactive measures can assist in repairing any damage done to your credit. You can support your credit by:
- Clearing outstanding debts: Your first step should be to clear any outstanding lease-related debts. Coming clean with your creditors showcases your commitment toward financial recovery and can soften the blow on your credit score.
- Setting up payment plans with creditors: Demonstrating a commitment to a payment plan can help you manage your finances better and chip away at the debt consistently.
- Monitoring and protecting your credit: Regularly checking credit reports helps you spot inaccuracies and address them promptly. Reach out to credit bureaus to contest any false or incorrect reports; this is your right as a consumer.
The bottom line
In this unpredictable journey of life, decisions like breaking a lease can sometimes be unavoidable. However, armed with the right knowledge, you can navigate even these rough waters and mitigate potential damage to your credit health. Remember to seek advice whenever you’re in doubt and approach matters transparently with your landlord.
To learn more about financial wellness and your credit score, check out our blog. And if you’re looking for a way to build your credit while sharing and spending responsibly, sign up for the Vital Card waitlist today.
The Servicemembers Civil Relief Act (SCRA) | Consumer Financial Protection Bureau
Can I Break a Lease Early? | Experian
4 Things Landlords Are Not Allowed to Do | Investopedia
Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.